Until Every Stock Is 0, Naked Shorting Is Good

So what? The question is not whether short-selling increased or decreased. It is whether specific criminal hedge funds manipulated the prices of specific stocks. Of those 799 stocks, more than 50 appear on the SEC’s “threshold” list of companies experiencing excessive “failures to deliver” – pretty good evidence of illegal manipulative naked short selling.

Meanwhile, it is important to note that many companies that do not appear on the “threshold” list might nonetheless have been victimized by market manipulators The SEC’s data is incomplete and does not register much illegal naked short selling – such as that which takes place “ex-clearing.” Moreover, a company makes the “threshold list” only if excessive “failures to deliver” occur for five consecutive days.

In the cases of many big financial institutions, the data through June shows unbridled naked short selling (with “failures to deliver” often exceeding 1 million shares) in stretches of less than five days. Typically, these stretches are followed by a brief pause (keeping the stock off the threshold list), after which there is another round of unbridled naked short selling.

The SEC has ordered a couple dozen hedge funds to hand over records of their trading in American International Group, Merrill Lynch, Washington Mutual, Goldman Sachs, Lehman Brothers, and Morgan Stanley. It is not difficult to see why the SEC is investigating. Though only Washington Mutual has appeared on the threshold list, the data through June shows that each of these stocks were exposed to repeated stretches of massive “failures to deliver,” often coinciding with the circulation of false rumors. No doubt, the data through September (soon to be made public) will be even uglier.